The Balances Remain Unbalanced

Watching the global imbalances in the global economy remains a worrying sign of economic policy in the advanced and the large emerging economies.

An evident – and closely watched one – is China’s trade surplus. June’s figures showed a large surge (China’s trade figures have been up and down over the last six months if you’ve been watching.) As pointed out by Bloomberg News (published in the New York Times July 10, 2010 – “Exports Hit Record in China as Trade Gap Surges”, at p. B2) the June figures reached a record for the year. The June figures rose 140 percent to $20.02 billion compared with the same period a year earlier. Exports rose 43.9 percent over a year earlier and import levels continued to moderate.

As is evident from the note above, operating on a single month’s figures is not wise. However, the export numbers are high and increased pressure on the Chinese is likely to emanate from the Obama Administration who in turn is being pressured by Congress on the renminbi-dollar exchange. These pressures are only likely to grow in the face of at best a very measured appreciation of the currency. Rising friction between the G2 is likely.

More intriguing are the imbalances that have become the subject of so much discourse recently including at the G8 and G20 Leaders. Politicians and economists have focused – compliments of Greece but other PIIGS as well (Portugal, Italy, Ireland, Greece and Spain)- on growing public debt. The target has been Europe but it spread to the United States where there has been an aggressive debate over Obama Administration profligacy. The Republican opposition has glommed on to this condemning the Administration for a failed fiscal stimulus and demanding an end to public spending. It has balked even at extending unemployment benefits to now unemployed American workers.

But behind the rise in deficits with the global financial crisis among almost all advanced countries, there are differences. While many advanced countries suffer from large trade and current account deficits – notably the US – there are exceptions – the Germans and in trade the Japanese. The US Treasury Secretary Geithner raised concerns over these surpluses as countries, the Germans in particular, announced austerity measures to rein in public spending – though the Germans have delayed implementation.

What is interesting – and commented on by FT columnist Martin Wolf, in his examination of the OECD Economic Outlook, in “Demand shortfall casts doubt on early austerity”, in his FT column, dated June 6th - is the large private – household and corporate – forecast surplus income over spending in these countries of some 7 percent of GDP or a predicted $3,000 billion. Now as Wolf points out, this surplus could be invested in the large emerging market countries but such is not likely. Wolf argues:

… the net flow of private funds from advanced countries to emerging countries will be close to $700bn this year. But that will be almost entirely offset by an official outflow, in the form of foreign currency reserves, of close to $600bn. These huge official interventions prevent the emergence of large net capital inflows into emerging countries.

What this leaves then is a large inflow of funds into the debt of the advanced countries. What it does not create is a significant flow of private capital. Though the advanced countries have urged growth friendly fiscal consolidation it is yet to be determined how to accomplish this. Consolidation yes; but also private sector spending and investment. How to do this? A key to altering these imbalances.

The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.

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